When you need credit, your first choice is probably to turn to a bank or credit union. Unfortunately, if you have a low credit rating, it can be difficult to get a loan from a traditional lender. Instead, you might turn to an alternative lender who can often provide loans that are easier and faster to get but might come with an extremely high-interest rate or fees.
Even though there are rules in place to limit the amount of interest a lender can charge, the government of Canada is now questioning if the rules need to change. This article explores the maximum loan interest rates allowed in Canada, how high-cost lending affects Canadians, and what you can do if you can’t afford to repay your loan interest rates.
What is the Criminal Rate of Interest in Canada?
In 1980 the criminal rate of interest was initially established and set at 60% as outlined in the Criminal Code of Canada Section 347.1. The government defines “interest” as including charges such as fees, fines, penalties, or commissions. The criminal rate of interest makes it illegal for lenders to charge an interest rate of more than 60%. This rule applies to most lending products in Canada, including:
- Installment loans
- Lines of credit
- Auto loans
- Auto title loans
- Credit cards
Unfortunately, payday loans are exempt from the criminal rate of interest and are instead governed by individual provinces. As a result, payday lenders can (and do) charge interest rates above the 60% threshold.
Payday Loans
If you’re experiencing a financial emergency and you don’t have any savings to fall back on, you might use a payday loan to help you fill the short-term financial gap. A payday loan, also known as a high-cost loan or high-cost credit, is a short-term loan that comes with high fees.
With a payday loan, you can borrow up to $1,500 and have a maximum of 62 days to pay it back. The average time to repay a payday loan is typically around 14 to 28 days.
A payday loan is pitched as easy and convenient to get but fails to highlight the high-interest rate and fees associated. A payday loan differs from a regular loan in that:
- You can only take them out for the short term, usually for a few weeks at a time
- You don’t need to go through a credit check
- You pay a flat fee instead of interest if you pay on time
- The loan provider will organize your repayment based on when you get your paycheque
After securing a payday loan, you are expected to repay it after you get your next paycheque. If you don’t, you have to pay additional fees or charges, making it even more expensive to borrow.
To highlight the cost of using a payday loan, imagine you need $300 to cover an unexpected car expense. Using a cash advance on a credit card over a 14-day period, it would cost $7.65 to borrow the money.
If you opted to borrow using a payday loan instead, it would cost you $51.00. This is equivalent to an annual interest rate of 442%, much higher than the 60% criminal rate of interest. Additionally, if you aren’t able to make your payment on time, you can incur an additional $40 penalty fee. So, borrowing $300 will now cost you $91. Now you have to come up with $391 to pay back your loan.
Unfortunately, many people are forced to turn to payday loans because they don’t have any other options. Then, a payday loan often reinforces the cycle of debt for financially vulnerable Canadians. This is why payday loans are often referred to as predatory loans.
Predatory lending is a term used to describe unethical lending practices. For instance, if a lender charges an unfair interest rate when lending money or if they use deceptive practices to get you to borrow.
How the Government is Fighting Predatory Lending
In the 2021 Budget, the government reached out to the public to provide their input on the topic of predatory lending and if the maximum loan interest rates should change. They asked for feedback on the following questions:
- Should the criminal rate of interest be set at a fixed rate or should it change with the market conditions?
- Why do Canadians access high-cost installment loans?
- How would lowering the criminal rate of interest impact the availability of credit for Canadians who use high-cost installment loans?
- How can the Government of Canada improve financial education and awareness around high-cost installment loans?
In addition to collecting this feedback, government economists are also looking into this issue to help inform the decision on what to do about the criminal interest rate. At this point, no changes have been made but the government is still interested in your feedback. If you want to share your thoughts or comments, you can contact the Department of Finance.
What to do if You Can’t Pay Back a High-Interest Loan
While many predatory loans are pitched as convenient and efficient ways to borrow money that you need, for one reason or another, this doesn’t make them a good option. Unfortunately, many people don’t fully understand what they are getting into when they sign on the dotted line.
If you are dealing with high-interest loan debt and are struggling to make your payments or you are insolvent, you do have options. Your best bet is to speak with a Licensed Insolvency Trustee (LIT) who can help you determine what to do next.
Consumer Proposal
A Consumer Proposal is a legal process administered by an LIT. You work with your LIT to develop a proposal to pay your creditors a percentage of what you owe. If your proposal is accepted, you have up to five years to pay off your debt. A Consumer Proposal covers unsecured debts such as credit cards and payday loans.
Bankruptcy
While the thought of Bankruptcy might make you feel scared or embarrassed, it can bring relief. Like a Consumer Proposal, Bankruptcy is a legal process administered by a LIT. The purpose of Bankruptcy is to give honest people who are having a difficult time a fresh start. In Bankruptcy, you may be discharged from most of your debt, including high-interest debt like payday loans.
Speak to a Licensed Insolvency Trustee
Ultimately you should avoid taking out a payday loan or other predatory loan options such as a high-interest line of credit. While they are typically easier to qualify for than a traditional loan from a bank or credit union, the high interest and fees can perpetuate a cycle of poverty. Before you borrow money make sure you know what you are getting into. Do your research and ask questions until you feel confident in your understanding of the product.
If you have taken on payday loans or other high-interest lending options and cannot afford to pay them back, reach out to a Licensed Insolvency Trustee today. At Allan Marshall and Associates we are here to help. You can book a risk-free 30-minute call with one of our experts to discuss your needs by calling us at 1-888-371-8900 or by filling out our online contact form.
